DCIT, Jaipur V. M/S. SHREE RAM KRIPA BUILDWELL P. LTD., Jaipur

ITA 1076/JPR/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 59516 (ITAT-JAIPUR)
• Duration Of Justice: 1 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-01-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 08-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Corroborative evidences
• Section: 37; 28; 144

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL JAIPUR BENCH B JAIPUR (BEFORE SHRI R.K.GUPTA AND SHRI N.L.KALRA) ITA NO.1076/ JP/2011 ASSESSMENT YEAR 2008-09 PAN: AAKCS 1423 N THE DCIT VS. M/S.SHREE RAM KRIPA BUILDCON (P) L TD. CIRCLE- 6 1, DAYAL NAGAR, GOPALPURA BYEPASS JAIPUR JAIPUR (APPELLANT ) (RESPONDENT) ITA NO.1078/ JP/2011 ASSESSMENT YEAR 2008-09 PAN: ABRPA 9062 C THE DCIT VS. SHRI RAM CHANDRA AGARWAL. CIRCLE- 6 21-A, TRIVENI CHAMBERS, GOPALPURA BYEP ASS JAIPUR JAIPUR (APPELLANT ) (RESPONDENT) DEPARTMENT BY : SHRI VINOD JOHRI ASSESSEE BY : SHRI VIJAY GOYAL DATE OF HEARING: 04-01-2012 DATE OF PRONOUNCEMENT: 13-01-2012 ORDER PER N.L. KALRA, AM:- THE BOTH THESE APPEALS HAVE BEEN FILED BY THE REVEN UE AGAINST TWO DIFFERENT ORDERS OF THE LD. CIT(A)-II, JAIPUR DATED 08-09-20 11 FOR THE ASSESSMENT YEAR 2008-09. 2.1 THE GROUND OF APPEAL RAISED BY THE REVENUE IN B OTH THE APPEALS ARE THE SAME EXCEPT THE QUANTUM OF THE RELIEF ALLOWED BY THE LD. CIT(A). HENCE, WE ARE DISPOSING OFF 2 BOTH THE APPEALS BY A CONSOLIDATED ORDER. THE GROUN D OF APPEAL RAISED BY THE REVENUE IN ITA NO. 1076/ JP/2011 IS AS UNDER:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) HAS ERRED IN :- (1) DELETING THE ADDITION OF RS. 62,34,041/- MADE B Y THE AO BY DISALLOWING DEVELOPMENT EXPENSES WITHOUT APPRECIATING THE FACT THAT THIS WAS MERE A PROVISI ON AND THERE WAS NO SCIENTIFIC METHOD WORK OUT LIABILITY. 2.2 THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF REAL ESTATE DEVELOPER. DURING THE YEAR UNDER REFERENCE, THE ASS ESSEE HAS SHOWN SALE OF RS. 2,36,62,503/- AND DECLARED LOSS OF RS. 22,58,693/-. THE AO NOTICED THAT THE ASSESSEE DEBITED THE EXPENSES ON ACCOUNT OF DEVELOPMENT TO T HE TUNE OF RS. 62,34,041/- IN THE PROFIT AND LOSS ACCOUNT THE AO NOTICED THAT THE ASS ESSEE HAS NOT ACTUALLY INCURRED SUCH EXPENSES BUT HAS SIMPLY MADE THE PROVISIONS AND THE SAME WAS SHOWN AS OUTSTANDING CURRENT LIABILITY IN THE BALANCE SHEET. THE PROVISI ONS HAS BEEN MADE AT RS. 175/- PER. SQ. YD IN RESPECT OF THE SALE CARRIED OUT DURING THE Y EAR. THE AO FURTHER NOTICED THAT THE ASSESSEE HAS NOT INCURRED ANY EXPENSES DURING NEXT ASSESSMENT YEAR I.E. 2009-10. FROM SUCH PROVISIONS, THE ASSESSEE HAS MADE PAYMENT MAIN LY TO JDA. ACCORDING TO THE AO, IT WAS NOT ASCERTAINABLE AS TO THE PURPOSE FOR WHICH P AYMENTS HAVE BEEN MADE TO JDA. THE AO ISSUED SHOW CAUSE NOTICE VIDE NOTE SHEET ENTRY D ATED 3 RD DEC. 2010 AND THE SAME IS REPRODUCED AS UNDER:- THE ASSESSEE COMPANY WAS ASKED TO JUSTIFY THE EXP ENSES DEBITED ON ACCOUNT OF DEVELOPMENT AMOUNTING TO RS. 62,34,0 40/- IN THE PROFIT AND LOSS ACCOUNT . THESE EXPENSES HAVE NOT B EEN MADE DURING AND SIMPLY A PROVISION HAS BEEN MADE @ 175/- PER SQ. YARD. AS PER DETAILS FURNISHED BY YOU, IT IS SEEN T HAT YOU HAVE 3 CREATED PROVISIONS IN SUBSEQUENT YEAR ALSO AND THE EXPENSES INCURRED IN THE SUBSEQUENT YEARS IS EVEN LESS THAN HALF OF THE PROVISIONS CREATED DURING THIS YEAR. DURING THIS Y EAR, THESE EXPENSES WHICH HAVE BEEN CLAIMED TO HAVE INCURRED I N SUBSEQUENT YEARS ARE INCURRED MAINLY FOR PAYMENT TO JDA 2.3 IN RESPONSE TO SHOW CAUSE NOTICE, THE ASSESSEE FILED THE REPLY VIDE LETTER DATED 15 TH DEC. 2010 AND THE SAME IS REPRODUCED BY THE AO AT P AGE 2 IN HIS ORDER. FOR READY REFERENCE, THE SAME IS REPRODUCED AS UNDER:- IN RESPONSE THE ASSESSEE VID4 HIS LETTER DATED 15 -12-2010 SUBMITTED THAT WE HAVE SUBMITTED THE DETAILS, JUSTI FICATION, EXPLANATION AND SUPPORTING EVIDENCE IN RESPECT OF DEVELOPMENT EXPENSES AND PROVISION AGAINST THAT. AS PER THE NOR MS OF JDA FOR PRIVATE TOWNSHIP, THE DEVELOPER HAS TO INCUR SEVERA L EXPENSES ON THE DEVELOPMENT OF THE SCHEME SUCH AS EXPENSES ON I NTERNAL ROADS, ELECTRIFICATION, WATER SUPPLY, SEWERAGE AND DEVELOP MENT OF PUBLIC PARKS AND FACILITIES ETC., THESE WORKS ARE REQUIRED TO BE COMPLETED OTHERWISE THE CHARGE AGAINST THESE ARE REQUIRED TO BE DEPOSITED IN AND THE COPY OF THE ORDER OF JDA IN THIS REGARD HAS BEEN SUBMITTED IN PREVIOUS HEARING OF THE CASE. THE ASSESSEE INCURRED THE EXPENSES ON DEVELOPMENT I N SUBSEQUENT YEARS. ADMITTEDLY THE QUANTUM OF DEVELOP MENT CARRIED OUT IN NEXT YEARS IS NOT THAT MUCH BUT ONLY FOR THI S REASON IS CANNOT BE PRESUMED THAT THE LIABILITY TO INCUR THESE EXPEN SES HAS BEEN CEASED OR NOT GENUINE, MORE SO WHEN THE ASSESSEE IS BOUND TO COMPLETE THE DEVELOPMENT WORK AS PER NORMS OF JDA. 2.4 ACCORDING TO THE AO, THE EXPENSES CLAIMED MERE LY ON THE BASIS OF PROVISION ARE NOT LIABLE TO BE ALLOWED. THE ASSESSEE IS NOT INCUR RING THE EXPENSES IN PROPORTION IN WHICH 4 THE PROVISION IS MADE. THE PROVISION SO CREATED BY THE ASSESSEE CAN BE DEBITED TO SUBSEQUENT YEAR WHEN THESE ARE ACTUALLY INCURRED AS THE COSTING OF THE PLOTS WERE WORKED OUT BY THE ASSESSEE TAKING INTO ACCOUNT THE OVERHEA D EXPENSES WHICH THE ASSESSEE NEEDS TO INCUR LATER ON. THE AO FURTHER MENTIONED THAT TH E ASSESSEE WAS UNABLE TO EXPLAIN AS TO WHICH YEAR THESE PROVISIONS WOULD BE EXHAUSTED. THE ASSESSEE HAS DEBITED THE PROVISION SO AS TO DECLARE THE INCOME AS PER SWEET WILL OF TH E ASSESSEE. THE PROVISIONS CAN BE ALLOWED IN CASE THE FOLLOWING THREE CONDITIONS ARE SATISFIED. 1. REASONABLENESS OF THE PROVISIONS. 2. HONESTY OF THE PROVISIONING OF EXPENSES 3. A FAIR BASIS / ESTIMATION OF EXPENSES FOR MAKING PR OVISIONS 2.5 ACCORDING TO THE AO, THE ASSESSEE HAS FAILED T O FULFILL EITHER OF THE ABOVE CONDITIONS. THE AO HAS RELIED ON THE FOLLOWING DECI SIONS IN DISALLOWING THE PROVISIONS FOR EXPENSES. 1 RAJASTHAN STATE MINES AND MINERAL LTD. VS. CIT 20 8 ITR 1010 (RAJ.) 2. TN SMALL INDUSTRIES DEVELOPMENT CORP. VS. CIT, 2 42 ITR 122 (MAD.) 2.6 ACCORDINGLY, THE AO DISALLOWED A SUM OF RS. 62, 34,041/-. 2.7 BEFORE THE LD. CIT(A), THE ASSESSEE ARGUED THAT DEVELOPMENT EXPENDITURE WAS DIRECT COST ATTRIBUTABLE TO THE SALES. THEREFORE, T HE TRUE PROFIT OF THE BUSINESS COULD BE COMPUTED BY DEDUCTING ALL THE DIRECT OR INDIRECT EX PENSES FROM THE SALES. SINCE CONSTRUCTION OF ROAD, LAYING PIPELINES, ELECTRIC LI NES ETC AND OTHER DEVELOPMENT WORK COULD NOT BE COMPLETED IN A PARTICULAR YEAR, THE ES TIMATION WAS REQUIRED TO BE MADE AGAINST THE EXPENSES TO BE INCURRED TOWARDS THE DEV ELOPMENT COST. THE PROVISION FOR 5 DEVELOPMENT EXPENSES WAS NOT SETTING APART THE PROF ITS BUT IT WAS AN ESTIMATION OF EXPENSES TO BE INCURRED ON THE PROJECT IN FUTURE. T HE SALE PROCEEDS RECEIVED BY THE ASSESSEE WAS SUBJECT TO THE LIABILITY OF DEVELOPMEN T WORK TO BE DONE BY THE ASSESSEE. THE LIABILITY TO INCUR THE DEVELOPMENT EXPENSES HAD ARI SEN IN THE YEAR OF THE SALE OF THE PLOT. THE SAID LIABILITY OUGHT TO HAVE BEEN DEDUCTED FR OM THE AMOUNT OF INCOME ACCRUED IN ORDER TO CALCULATE TRUE PROFIT. THE HON'BLE RAJASTH AN HIGH COURT IN THE CASE OF CIT VS. GOVIND GRAH NIRMAN SAHAKARI SAMITI LTD (258 ITR 208 ) HAS HELD THAT THE EXPENDITURE IN DEVELOPING THE LAND, LAYING DOWN PIPE LINE DIVIDING THE LAND INTO SMALL PLOTS WERE EXPENSES REQUIRED TO BE INCURRED FOR THE PURPOSE OF CARRYING ON THE BUSINESS OF SELLING THE LAND AND THESE EXPENSES WERE ALLOWABLE EXPENSES. IN THE CASE OF BADRIDAS DAGA VS CIT (34 ITR 10), THE HON'BLE APEX COURT HAS OBSERVED TH AT WHILE SECTION 10(1) OF THE 1922 ACT [ANALOGOUS TO SECTION 28(I) OF THE ACT] IMPOSED A CHARGE ON THE PROFIT OR GAINS OF TRADE. WHETHER A CLAIM FOR DEDUCTION ADMISSIBLE NOT WILL DEPEND ON WHETHER HAVING REGARD TO THE ACCEPTED COMMERCIAL PRACTICE AND TRAD ING PRINCIPLES. IF IT CAN BE SAID TO BE ARISING OUT OF CARRYING ON THE BUSINESS AND INCIDEN TAL TO IT AND IF THAT IS ESTABLISHED, THEN THE DEDUCTION MUST BE ALLOWED. THE LEVY OF TAX IS O N PROFITS OR GAINS AS UNDERSTOOD IN THE COMMERCIAL SENSE AND DETERMINATION OF PROFITS AND G AINS WOULD BE VITAL AREA OF THE COMPUTATION AND DETERMINATION OF INCOME AND LIABILI TY TO TAX AS HELD BY THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS COIMBATORE PICTURES PRIVATE LIMITED (90 ITR 452). THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS SHOORJI VALLABHDAS & CO (46ITR 144) LAID DOWN THAT THE INCOME TAX IS LEVY ON THE R EAL INCOME OF BUSINESS OR PROFESSION. THE HON'BLE SUPREME COURT IN POONA ELECTRIC SUPPLY CO LTD VS CIT(57 ITR 521) HAS LAID DOWN THE PRINCIPLE THAT UNDER THE I T ACT, 'TA X' SHALL BE PAYABLE BY AN ASSESSEE UNDER 6 THE HEAD 'PROFITS AND GAINS OF BUSINESS' IN RESPECT OF THE PROFITS AND GAINS OF ANY BUSINESS CARRIED ON BY HIM. THE SAID PROFIT AND GAINS ARE PR OFITS OF A BUSINESS COMPUTED ON BUSINESS PRINCIPLES. THE ASSESSEE FOLLOWS THE MERCA NTILE SYSTEM OF THE ACCOUNTING. THE ASSESSEE'S SALES CONSISTED OF TWO THINGS; FIRST THE COST OF LAND AND SECOND DEVELOPMENT EXPENSES. SINCE THE DEVELOPMENT EXPENSES CANNOT BE INCURRED ON PLOT TO PLOT BASIS AND BUT ARE INCURRED FOR WHOLE SCHEME AND SOMETIMES FOR ALL THE SCHEMES. THEREFORE, THE DEVELOPMENT EXPENSES HAVE TO BE INCURRED AGAINST TH E PLOT SOLD IN A PARTICULAR YEAR AND IT HAS TO BE ESTIMATED AND TO THAT EXTENT THE SALES AR E SET APART UNDER THE NOMENCLATURE 'PROVISION FOR DEVELOPMENT EXPENSES'. AS PER THE NO RMS OF JDA FOR PRIVATE TOWNSHIP, THE DEVELOPER HAS TO INCUR SEVERAL EXPENSES ON THE DEVELOPMENT OF THE SCHEME SUCH AS EXPENSES ON INTERNAL ROADS, ELECTRIFICATION, WATER SUPPLY AND DEVELOPMENT OF PUBLIC PARKS AND FACILITIES ETC. THE COST OF THESE EXPENSES IS I NCLUDED IN THE SALE PRICE OF THE PLOT AND THE CHARGES AGAINST THE DEVELOPMENT EXPENSES (WHICH TO BE INCURRED BY THE DEVELOPER) IS NOT BEING CHARGED SEPARATELY IN ADDITION TO THE SAL E PRICE OF THE PLOT TAKEN BY THE DEVELOPER. THE DEVELOPMENT WORK HAS TO BE CARRIED OUT AS PER THE SPECIFICATION OF THE JDA. THUS, THE SALE OF THE ASSESSEE IS SUBJECT TO A SCERTAINED LIABILITY OF DEVELOPMENT EXPENSES. THIS LIABILITY HAS ARISEN IN THE YEAR OF SALE OF THE PLOT. THE SAID LIABILITY OUGHT TO HAVE BEEN DEDUCTED FROM THE AMOUNT OF INCOME ACC RUED IN ORDER TO ARRIVE AT THE TRUE AND FAIR PROFITS OF A BUSINESS OR PROFESSION, THERE FORE THE ESTIMATION OF FUTURE COST OF DEVELOPMENT SHOWN IN BOOKS OF ACCOUNT AS 'PROVISION AGAINST DEVELOPMENT EXPENSES' ARE ALLOWABLE EXPENSES U/S 37 OF INCOME TAX ACT READ WI TH SECTION 28 OF INCOME TAX ACT. IT IS PREVAILING ACCOUNTING POLICY OF THE ASSESSEE AND OTHER ASSESSEES OF SIMILAR TRADE TO MAKE PROVISION OF DEVELOPMENT EXPENSES TO BE INCURR ED ON AREA SOLD IN ORDER TO ARRIVE AT 7 THE TRUE AND CORRECT PROFIT AND THE ASSESSEE IS CON SISTENTLY FOLLOWING THIS ACCOUNTING PRACTICE. IN THE BUSINESS OF COLONIZER, THE DEVELOP MENT EXPENSES COULD NOT BE INCURRED ON PLOT TO PLOT BASIS. SUPPOSE AN ASSESSEE HAD 100 PLO TS IN A SCHEME AND SOLD ONLY 10 PLOTS IN PARTICULAR YEAR, THE ROADS, ELECTRIC POLE ETC CO ULD NOT BE LAID DOWN ONLY FOR 10 PLOTS. THE EXPENSES HAD TO BE INCURRED FOR WHOLE SCHEME IR RESPECTIVE TO THE PLOTS SOLD. THE ASSESSEE WAS FOLLOWING 'MERCANTILE SYSTEM OF ACCOUN TING' AS AGAINST 'COMPLETED COST METHOD' OR 'CASH METHOD'. THE AO SUGGESTED IN THE A SSESSMENT ORDER THAT THE DEVELOPMENT EXPENSES COULD BE CHARGED TO REVENUE IN THE YEAR WHEN THESE WERE ACTUALLY INCURRED. THIS SYSTEM OF ACCOUNTING WOULD SHIFT FRO M MERCANTILE TO CASH BASIS, WHICH WAS CERTAINLY NOT PROPER SYSTEM OF ACCOUNTING. IN MERCA NTILE SYSTEM OF ACCOUNTING, IF THE DEVELOPMENT EXPENSES WERE TO BE ALLOWED ON PAYMENT BASIS THEN IT WOULD GIVE AN ABSURD TRADING RESULT. THE DEVELOPMENT WORK HAD TO BE CARR IED OUT AS PER THE SPECIFICATION OF THE JDA. THE COPY OF THE ORDER OF JDA IN RESPECT OF THE DEVELOPMENT WORK AND ESTIMATED AMOUNT OF EXPENSES ON EACH ACTIVITY OF DEVELOPMENT WHEREIN THE EXPENSES ON THE EACH ACTIVITY WERE ESTIMATED BY JDA, WAS ALSO SUBMITTED. THE TOTAL COST ESTIMATED BY JDA WAS RS 250 PER SQ METRE AGAINST WHICH THE ASSESSEE HAD MADE PROVISION FOR EXPENSES @ 175/- PER SQ YARD. THE BREAKUP OF THE ASSESSEE'S ESTIMATI ON WAS FILED BEFORE THE AO AS UNDER:- ROAD WATER ELECTRIC PARK/FACILITY OTHERS (STREET LIGHT, PLANTATION, ETC) TOTAL ESTIMATED COST TO BE INCURRED PROVISION MADE 51 47 38 17 27 180 175 THEREFORE, THE ESTIMATION OF THE ASSESSEE COMPANY W AS SUPPORTED BY THE ESTIMATION OF THE EXPENSES BY GOVERNMENT AGENCY. FURTHER, THE ASSESSE E WAS BOUND TO CARRY OUT THESE WORKS AS PER JDA REGULATIONS. HOWEVER, THE PRIVATE COLONIZERS HAD LIBERTY TO CARRY OUT 8 DEVELOPMENT WORK THROUGH JDA AS AGAINST TO CARRY OU T DEVELOPMENT WORK THEMSELVES. IT WAS ARGUED THAT THERE WAS DIRECT DECISION OF HON'BL E APEX COURT ON THIS ISSUE. IN THE CASE OF CALCUTTA CO LTD VS COMMISSIONER OF INCOME TAX (3 7 ITR 1), THE SUPREME COURT WAS CONSIDERING A CASE OF A LAND DEVELOPER, WHO HAD UND ERTAKEN TO DEVELOP THE LAND BY LAYING OUT ROADS, PROVIDING OF DRAINAGE SYSTEM AND INSTALL ATION OF LIGHTS ETC. SOME OF THE PLOTS WERE SOLD BY THE ASSESSEE AGAINST A CONSIDERATION O F RS. 29,392/-. FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, THE ASSESSEE CREDITED THE ENT IRE SUM OF RS. 43,692 BEING THE FULL SALE PRICE OF THE LAND. AT THE SAME TIME, IT ALSO D EBITED AN ESTIMATED SUM OF RS. 24,809 ON ACCOUNT OF THE EXPENDITURE FOR DEVELOPMENT, IT HAD UNDERTAKEN TO CARRY OUT, EVEN THOUGH NO PART OF THAT AMOUNT WAS ACTUALLY SPENT. THE DEPA RTMENT HAD DISALLOWED SUCH EXPENDITURE. ULTIMATELY THE MATTER REACHED THE SUPR EME COURT AND IT WAS HELD THAT ASSESSEE WAS JUSTIFIED IN COMPUTING THE PROFIT IN T HE MANNER IT DID. THE HON'BLE ITAT DELHI BENCH HAS FOLLOWED THE ABOVE DECISION OF HON' BLE APEX COURT IN THE CASE OF GREATER ASHOKA LAND & DEVELOPMENT CO (P) LIMITED VS ASSISTANT COMMISSIONER OF INCOME TAX (79 ITD 595) AND HELD THAT PROFITS SHOUL D BE DETERMINED BY SPREADING OVER THE ESTIMATED COST IN CARRYING OUT THE DEVELOPMENT OF LAND OVER THE SALEABLE AREA OF THE PLOTS. SINCE BY NOW, THE PROJECT HAD BEEN COMPLETED BY THE ASSESSEE IN 2001, THE ACTUAL COST INCURRED BY THE ASSESSEE ON THE DEVELOPMENT OF THE LAND COULD BE CONSIDERED FOR SPREADING OVER THE SAME OVER THE SALEABLE AREA OF T HE PLOTS AND ACCORDINGLY APPROPRIATE DEDUCTION SHOULD BE ALLOWED AGAINST THE SALE CONSID ERATION OF THE PLOTS SOLD IN THE YEAR UNDER CONSIDERATION. THE LIABILITY TOWARDS DEVELOPM ENT EXPENSES TO BE INCURRED IN FUTURE ON THE PLOTS SOLD DID NOT EXTINGUISH MERELY FOR THE REASON THAT THE ASSESSEE HAD NOT INCURRED EXPENSES IN NEXT YEAR OR FOR NEXT FEW YEAR . THIS LIABILITY EXTINGUISHED ONLY WHEN 9 THE ASSESSEE ABSOLVED FROM THE LIABILITY TO CONSTRU CT THE INTERNAL ROADS OR LAYING DOWN ELECTRIC POLES/WATER LINES ETC. THE ASSESSEE COULD NOT BE ABSOLVED FROM THIS LIABILITY BECAUSE OF REGULATION OF JDA AND THE PLOTS SOLD BY THE ASSESSEE WERE SUBJECT TO THIS LIABILITY OF THE ASSESSEE. THOUGH THE ASSESSEE COUL D NOT INCUR THE DEVELOPMENT EXPENSES IN AY 2009-2010 (THE ASSESSEE HAD TWO SCHEMES HANUMAN VATIKA A-2 AND HANUMAN VATIKA A-3), HOWEVER THERE WERE GENUINE DIFFICULTIES IN CARRYING OUT DEVELOPMENT EXPENSES. THE HANUMAN VATIKA A-2 SCHEME WAS SCATTERED IN THREE PARTS AND ALSO SURROUNDED BY THE LAND OF OTHER AGRICULTURISTS. THE APPROACH ROAD WAS NOT GIVEN BY THE OTHER AGRICULTURISTS FROM THEIR FARMS, SO TRANSPORT ATION OF MATERIAL WAS NOT POSSIBLE. THE JDA PASSED THE SCHEME FOR PART OF THE LAND. THE 90B PROCEEDINGS WERE COMPLETED ONLY IN RESPECT OF KHASRA NO 217, 220 WHEREAS THE ASSESSEE'S SCHEME CONSISTED OF KHASRA N O 217,220, 345, 346, 235 AND 236. ON FINAL APPROVAL OF SCHEME, THE SCHEME PLAN WAS SUBJECT OF CHANGE BY JDA THEREFORE, THE CONSTRUCTION OF ROAD ETC COULD NOT B E COMPLETED BEFORE FINAL APPROVAL OF SCHEME PLAN BY JDA. FURTHER THERE WAS COURT CASE BY SOME PARTY OVER THIS LAND. THE COPARCENER AND OTHER PARTIES HA D FILED COURT CASE AGAINST THE ASSESSEE AND THE ACTUAL POSSESSION OF THE LAND WAS NOT ALLOW ED TO BE TAKEN BY THE ASSESSEE. THIS SCHEME WAS VERY SMALL SCHEME CONSISTING OF ONLY 37 PLOTS (TOTAL AREA 6962.04 SQ YARD). THE TOTAL AREA SOLD WAS 2488.92 SQ YARD. THE ASSESSEE WAS NOT ABSOLVED FROM THE LIA BILITY TO CONSTRUCT THE ROADS, LAYING OF ELECTRIC POLES, W ATER LINES ETC MERELY BECAUSE THE ASSESSEE HAD NOT CONSTRUCTED THE SAME IN AY 2009-2010 OR AY 2010-2011. THE ASSESSEE HAD TO INCUR THESE EXPENSES AS PER JDA R EGULARIZATION. THE HANUMAN VATIKA A-3 SCHEME WAS SITUATED ON THE PROPOSED SECTOR ROAD OF 200 FT WIDE. THE CONSTRUCTION OF SECTOR ROAD WAS TO BE MADE BY JDA. THE JDA DID NOT START WORK FOR SECTOR ROAD, THEREFORE, THE 10 CONNECTIVITY OF THIS SCHEME BY ROAD WAS NOT THERE. THE APPROACH ROAD WAS NOT GIVEN BY THE OTHER AGRICULTURISTS FROM THEIR FARMS AND DUE T O THIS, THE TRANSPORTATION OF MATERIAL NOT POSSIBLE. DUE TO THIS PRACTICAL DIFFICULTY OF SITE, THE DEVELOPMENT WORK COULD NOT BE CARRIED OUT. THE ASSESSEE WAS NOT ABSOLVED FROM THE LIABILITY TO CONSTRUCT THE ROADS, LAYING OF ELECTRIC POLES, WATER LINES ETC. MERELY BECAUSE THE ASSESSEE HAD CONSTRUCTED THE SAME IN ASSESSMENT YEAR 2009-10 OR 2010-2011.THE ASSESSEE H AD TO INCUR THESE EXPENSES OTHERWISE THE JDA WOULD NOT ISSUE PATTA AGAINST THE PLOTS SOLD BY THE ASSESSEE. ANY PROVISION MADE FOR THE OBLIGATION OF EXPENSES TO BE INCURRED IN FUTURE AGAINST THE CURRENT YEAR'S SALE WAS AN ALLOWABLE EXPENDITURE. THE PROVI SION AGAINST WARRANTY EXPENSES WAS MOST APPROPRIATE EXAMPLE OF IT. THE HON'BLE APEX CO URT IN THE CASE OF ROTORK CONTROLS INDIA (P) LTD VS CIT (314 ITR 62) HAS DISCUSSED THE ISSUE OF ALLOWABILITY OF PROVISION IN DETAIL AND THE RELEVANT PARA ARE REPRODUCED AS UNDE R:- 'WHAT IS A PROVISION ? THIS IS THE QUESTION WHICH N EEDS TO BE ANSWERED. A PROVISION IS A LIABILITY WHICH CAN BE MEASURED ONLY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISION IS RECOGNIZED WHE N AN ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT OR I T IS PROBABLE THAT AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE OBLIGATION; AND A RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF THE OBLIGATIO N. IF THESE CONDITIONS ARE NOT MET, NO PROVISION CAN BE RECOGNIZED. LIABIL ITY IS DEFINED AS A PRESENT OBLIGATION ARISING FROM PAST EVENTS, THE SE TTLEMENT OF WHICH IS EXPECTED TO RESULT IN AN OUTFLOW FROM THE ENTERPRIS E OF RESOURCES EMBODYING ECONOMIC BENEFITS. A PAST EVENT THAT LEAD S TO A PRESENT OBLIGATION IS CALLED AS AN OBLIGATING EVENT. THE OB LIGATING EVENT IS AN EVENT THAT CREATES AN OBLIGATION WHICH RESULTS IN AN OUTF LOW OF RESOURCES. IT IS ONLY THOSE OBLIGATIONS ARISING FROM PAST EVENTS EXI STING INDEPENDENTLY OF THE FUTURE CONDUCT OF THE BUSINESS OF THE ENTERPRIS E THAT IS RECOGNIZED AS 11 PROVISION. FOR A LIABILITY TO QUALIFY FOR RECOGNITI ON THERE MUST BE NOT ONLY PRESENT OBLIGATION BUT ALSO THE PROBABILITY OF AN O UTFLOW OF RESOURCES TO SETTLE THAT OBLIGATION. WHERE THERE ARE NUMBER OF O BLIGATIONS (E.G. PRODUCT WARRANTIES OR SIMILAR CONTRACTS) THE PROBABILITY TH AT AN OUTFLOW WILL BE REQUIRED IN SETTLEMENT, IS DETERMINED BY CONSIDERIN G THE SAID OBLIGATIONS AS A WHOLE. IN THIS CONNECTION, IT MAY BE NOTED THAT I N THE CASE OF A MANUFACTURE AND SALE OF ONE SINGLE ITEM THE PROVISI ON FOR WARRANTY COULD CONSTITUTE A CONTINGENT LIABILITY NOT ENTITLED TO D EDUCTION UNDER SECTION 37 OF THE SAID ACT. HOWEVER, WHEN THERE IS MANUFACTURE AND SALE OF AN ARMY OF ITEMS RUNNING INTO THOUSANDS OF UNITS OF SOPHIST ICATED GOODS, THE PAST EVENT OF DEFECTS BEING DETECTED IN SOME OF SUCH ITE MS LEADS TO A PRESENT OBLIGATION WHICH RESULTS IN AN ENTERPRISE HAVING NO ALTERNATIVE TO SETTLING THAT OBLIGATION. IN THE PRESENT CASE, THE APPELLANT HAS BEEN MANUFACTURING AND SELLING VALVE ACTUATORS. THEY ARE IN THE BUSINESS FROM ASSESSMENT YEAR 1983-84 ONWARDS. VALVE ACTUATORS ARE SOPHISTICATED GOODS. OVER THE YEARS APPELLANT HAS BEEN MANUFACTURING VALVE ACTUATORS IN LARGE NUMBERS. THE STATISTICAL DATA INDICATES THAT EVERY YEAR SOME OF THESE MANUFACTURED ACTUATORS ARE FOUND TO BE DEFECTIVE. THE STATISTICA L DATA OVER THE YEARS ALSO INDICATES THAT BEING SOPHISTICATED ITEM NO CUSTOMER IS PREPARED TO BUY VALVE ACTUATOR WITHOUT A WARRANTY. THEREFORE, WARRA NTY BECAME INTEGRAL PART OF THE SALE PRICE OF THE VALVE ACTUATOR(S). IN OTHER WORDS, WARRANTY STOOD ATTACHED TO THE SALE PRICE OF THE PRODUCT. TH ESE ASPECTS ARE IMPORTANT. AS STATED ABOVE, OBLIGATIONS ARISING FRO M PAST EVENTS HAVE TO BE RECOGNIZED AS PROVISIONS. THESE PAST EVENTS ARE KNO WN AS OBLIGATING EVENTS. IN THE PRESENT CASE, THEREFORE, WARRANTY PR OVISION NEEDS TO BE RECOGNIZED BECAUSE THE APPELLANT IS AN ENTERPRISE H AVING A PRESENT OBLIGATION AS A RESULT OF PAST EVENTS RESULTING IN AN OUTFLOW OF RESOURCES. LASTLY, A RELIABLE ESTIMATE CAN BE MADE OF THE AMOU NT OF THE OBLIGATION. IN SHORT, ALL THREE CONDITIONS FOR RECOGNITION OF A PR OVISION ARE SATISFIED IN THIS 12 CASE. IF WARRANTY PROVISIONS ARE BASED ON EXPERIENC E AND HISTORICAL TREND(S) AND IF THE WORKING IS ROBUST THEN THE QUESTION OF R EVERSAL IN THE SUBSEQUENT TWO YEARS, IN THE ABOVE EXAMPLE, MAY NOT ARISE IN A SIGNIFICANT WAY. IN OUR VIEW, ON THE FACTS AND CIRCUMSTANCES OF THIS CASE, PROVISION FOR WARRANTY IS RIGHTLY MADE BY THE APPELLANT-ENTERPRISE BECAUSE IT HAS INCURRED A PRESENT OBLIGATION AS A RESULT OF PAST EVENTS'. THE ABOVE DECISION OF HON'BLE APEX COURT SUGGESTS T HAT THE ASSESSEE HAS CORRECTLY MADE ACCOUNTING FOR TREATMENT OF DEVELOPMENT EXPENSES AN D SINCE THE PROVISION AGAINST THE DEVELOPMENT EXPENSES IS AN OBLIGATION OF THE ASSESS EE AGAINST THE CURRENT YEAR'S SALE, IT IS AN ALLOWABLE EXPENDITURE. FURTHER, THE ACCOUNTING O F DEVELOPMENT EXPENSES ON CASH BASIS IS NOT CORRECT METHOD OF ACCOUNTING. IN VIEW OF ABO VE SUBMISSIONS, IT WAS PRAYED TO DELETE THE ADDITION. 2.8 THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSION S OF THE ASSESSEE RECORDED THE FOLLOWING FINDINGS WHICH ARE SUMMARIZED AS UNDER:- 1. THE ASSESSEE PURCHASES THE AGRICULTURAL LAND AND GETS IT CONVERTED INTO NON-AGRICULTURAL LAND AFTER OBTAININ G APPROVAL FROM JDA. THE LAND IS DIVIDED INTO SMALL PLOTS AND THESE PLOTS ARE SOLD TO THE PROSPECTIVE CLIENTS AFTER BOOKING. THE ASSES SEE IS REQUIRED TO INCUR THE EXPENSES ON DEVELOPMENT OF PLOTS INCLUDIN G LAYING DOWN ROAD, ELECTRIFICATION, WATER SUPPLY AND OTHER FACIL ITIES AND DEVELOPMENT OF OTHER FACILITIES SUCH AS PUBLIC PARK S 2. THE DEVELOPMENT EXPENDITURE WAS DIRECT COST ATTR IBUTABLE TO THE REVENUE AND WITHOUT DEDUCTING THE SAME, THE TRU E PROFITS OF SALE CONSIDERATION CANNOT BE COMPUTED. THE DEVELOPMENT W ORK CANNOT BE COMPLETED IN A PARTICULAR YEAR AND ESTIMATION IS REQUIRED TO BE MADE AGAINST THE EXPENSES TO BE INCURRED IN FUTURE TOWARDS THE DEVELOPMENT COST. 13 3. AS PER NORMS OF JDA FOR PRIVATE TOWNSHIP, THE DE VELOPER HAD TO INCUR SAVE EXPENSES ON THE DEVELOPMENT OF TH E SCHEME SUCH AS EXPENSES ON INTERNAL ROADS, ELECTRIFICATION, SEW ER LINES, WATER SUPPLY AND DEVELOPMENT OF PUBLIC PARKS AND FACILITI ES ETC. THE COST OF SUCH EXPENSES IS INCLUDED IN THE SALE PRICE OF T HE PLOT. 4. THE ASSESSEE CAN ACCOUNT FOR DEVELOPMENT EXPENDI TURE IN THE YEAR IN WHICH IT WAS ACTUALLY INCURRED. HOWEVER , THE OPTION BASED ON CASH BASIS IS NOT CORRECT WHEN THE ASSESS EE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING . AS PER COMPAN IES ACT, THE ASSESSEE IS REQUIRED TO FOLLOW THE MERCANTILE SYSTE M OF ACCOUNTING. THE ACCOUNTING STANDARDS ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA ALSO MENTIONS THAT SUCH EXPENSE S ARE TO BE DEBITED ON THE BASIS OF ACCRUAL OF SUCH LIABILITY. 5. UNDER THE MATCHING CONCEPT, THE COST IS TO BE CL AIMED IN THE YEAR IN WHICH REVENUE IS RECEIVED. THE COST INCLUDE S THE FUTURE LIABILITY RELATING TO THE ITEM INCLUDED IN THE REVE NUE RECEIPTS. 2.9 THE LD. CIT(A) HAS REFERRED TO THE DECISION OF HON'BLE APEX COURT IN THE CASE OF BHARAT EARTHMOVERS VS. CIT, 245 ITR 428 IN WHICH IT HAS BEEN HELD THAT DEDUCTION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY HAVE T O BE QUANTIFIED AND DISCHARGED AT FUTURE DATE. DURING THE YEAR, THE A HAS TWO SCHEMES NAMELY HANUMAN VATIKA A-2 AND HANUMAN VATIKA A-3. IN HANUMAN VATIKA A-2 SCHEME, T HE ASSESSEE COULD NOT MAKE THE APPROACH ROAD. THE LAND WAS SURROUNDED BY THE LAND OF OTHER AGRICULTURISTS. THE CONSTRUCTION OF ROAD ETC. COULD NOT BE COMPLETED BE FORE FINAL APPROVAL OF SCHEME PLAN BY JDA. IN RESPECT OF HANUMAN VATIKA A-3, THE ASSESSE E STATED THAT THE CONSTRUCTION OF SECTOR ROAD WAS TO BE MADE BY JDA AND JDA DID NOT S TART WORK. THEREFORE, THE APPROACH ROAD COULD NOT BE MADE, THE LD. CIT(A) WAS OF THE O PINION THAT EXPENDITURE COULD NOT BE 14 INCURRED DUE TO CERTAIN PROBLEMS AND IT IS NOT THE CASE THAT THE ASSESSEE IS NOT REQUIRED TRO INCUR THE EXPENDITURE. THE LIABILITY IS IN PRESENTI AND THEREFORE, TO BE ALLOWED. 2.10 BEFORE THE LD. CIT(A), IT WAS SUBMITTED THAT T HE ASSESSEE HAD MADE TH EPAYEMNT OF RS. 12,44,645/- TO JDA IN ASSESSMENT YEAR 2010-11 F OR CONSTRUCTION OF SECTOR ROAD. THE LD. CIT(A) HAS RELIED UPON THE FOLLOWING DECISIONS IN DELETING THE ADDITION MADE BY THE AO. 1. CALCUTTA CO. LTD. VS. CIT, 37 ITR 1 (SC) 2. GREATER ASHOKA LAND DEVELOPMENT CO. LTD. VS. ACIT, 79 ITD 595 (SC) 3. CIT VS. GOVIND GRAH NIRMAN SAHAKARISAMITI LTD. , 25 8 ITR 208 (RAJ.) 4. CIT VS. MODERN SPINNERS LTD. , 284 ITR 308 (DEL.) 5. CIT VS. VINITEC CORPORATION LTD. 278 ITR 337 (DEL.) 2.11 BEFORE US, THE LD. DR DREW OUR ATTENTION TO TH E FACT THAT THE ASSESSEE HAS NOT INCURRED EXPENSES DURING THE YEAR UNDER REFERENCE. EVEN BEFORE COMPLETION OF ASSESSMENT, SUCH EXPENSES WERE NOT INCURRED. THE LD . DR SUBMITTED THAT THE ASSESSEE WAS NOT ABLE TO EXPLAIN THE AO THE PURPOSE FOR WHICH PA YMENTS HAVE BEEN MADE TO JDA . THE LD. DR SUBMITTED THAT UNDER SUCH FACTUAL POSITION , THE EXPENDITURE SHOULD HAVE BEEN ALLOWED ON CASH AND BASIS AND NOT ON ACCRUAL BASIS. 2.12 BEFORE US, THE LD. AR HAS FILED THE SUBMISSION S WHICH ARE REPRODUCED AS UNDER:- 15 2.31 THE LD CIT(A) HAS GIVEN HIS DETAILED FINDINGS ON TH E ISSUE IN HIS ORDER AT PAGE 8 TO 15 OF HIS ORDER. THE ASSE SSEE RELIES ON THE FINDINGS OF CIT(A) AND CASE LAWS MENTIONED BY THE CIT(A) IN HIS ORDER. 2.3.2 THE SIMILAR ISSUE HAS BEEN DECIDED BY THIS HO NBLE BENCH IN THE GROUP CONCERN OF THE ASSESSEE M/S SALASAR OV ERSEAS PRIVATE LIMITED ITA NO. 433/JP/2011 VIDE ORDER DATED 22.11.2011. TH E FACTS OF THIS CASE ARE SAME. THEREFORE, THE APPEAL FILED BY THE REVENU E DESERVES TO BE REJECTED. 2.3.3. DEVELOPMENT EXPENDITURES ARE BUSINESS EXPEND ITURE THE DEVELOPMENT EXPENSES IS DIRECT COST ATTRIBUTA BLE TO THE SALES THEREFORE THE TRUE PROFIT OF THE BUSINESS CAN BE CO MPUTED BY DEDUCTING THE ALL THE DIRECT OR INDIRECT EXPENSES FROM THE SALES . SINCE CONSTRUCTION OF ROAD, LAYING PIPELINES, ELECTRIC LINES ETC AND OTHE R DEVELOPMENT WORK CANNOT BE COMPLETED IN A PARTICULAR YEAR, THE ESTIM ATION IS REQUIRED TO BE MADE AGAINST THE EXPENSES TO BE INCURRED TOWARDS TH E DEVELOPMENT COST. THE PROVISION FOR DEVELOPMENT EXPENSES IS NOT SETTI NG APART THE PROFITS BUT IT IS AN ESTIMATION OF EXPENSES TO BE INCURRED ON T HE PROJECT IN FUTURE. THE SALE PROCEED RECEIVED BY THE ASSESSEE IS SUBJECT TO THE LIABILITY OF DEVELOPMENT WORK TO BE DONE BY THE ASSESSEE. THE LI ABILITY TO INCUR THE DEVELOPMENT EXPENSES HAS ARISEN IN THE YEAR OF THE SALE OF THE PLOT. THE SAID LIABILITY OUGHT TO HAVE BEEN DEDUCTED FROM THE AMOUNT OF INCOME ACCRUED IN ORDER TO CALCULATE TRUE PROFIT. HONBLE RAJASTHAN HIGH COURT IN THE CASE OF CIT VS GOVIND GRAH NIRMAN SAHAKARI SAMI TI LTD 258 ITR 208 (RAJ) HAS HELD THAT THE EXPENDITURE IN DEVELOPING T HE LAND, LAYING DOWN PIPE LINE DIVIDING THE LAND INTO SMALL PLOTS WERE E XPENSES REQUIRED TO BE INCURRED FOR THE PURPOSE OF CARRYING ON THE BUSINES S OF SELLING THE LAND AND THESE EXPENSES ARE ALLOWABLE EXPENSES. IN THE CASE OF BADRIDAS DAGA VS CIT 34 ITR 10 (SC), HONBLE APEX COURT HAS OBSERVED THAT WHILE SECTION 10(1) OF THE 1922 ACT [ANALOGOUS TO SECTION 28(I) O F THE ACT] IMPOSED A CHARGE ON THE PROFIT OR GAINS OF TRADE. WHETHER A C LAIM FOR DEDUCTION ADMISSIBLE OR NOT WILL DEPEND ON WHETHER HAVING REG ARD TO THE ACCEPTED COMMERCIAL PRACTICE AND TRADING PRINCIPLES IT CAN B E SAID TO ARISE OUT OF CARRYING ON OF THE BUSINESS AND INCIDENTAL TO IT AN D IF THAT IS ESTABLISHED, THEN THE DEDUCTION MUST BE ALLOWED. THE LEVY OF TAX IS ON PROFITS OR GAINS AS UNDERSTAN D IN THE COMMERCIAL SENSE AND DETERMINATION OF PROFITS AND G AINS WOULD BE VITAL AREA OF THE COMPUTATION AND DETERMINATION OF INCOME AND LIABILITY TO TAX [CIT VS COIMBATORE PICTURES PRIVATE LIMITED 90 ITR 452 MAD]. HONBLE SUPREME COURT IN THE CASE OF CIT VS SHOORJI VALLABH DAS & CO 46 ITR 144 SC LAID DOWN THAT THE INCOME TAX IS LEVY ON THE REAL INCOME OF 16 BUSINESS OR PROFESSION. HONBLE SUPREME COURT IN PO ONA ELECTRIC SUPPLY CO LTD VS CIT 57 ITR 521 SC HAS LAID DOWN PRINCIPLE THAT UNDER THE IT ACT TAX SHALL BE PAYABLE BY AN ASSESSEE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS IN RESPECT OF THE PROFITS AND GA INS OF ANY BUSINESS CARRIED ON BY HIM. THE SAID PROFIT AND GAINS ARE PR OFITS OF A BUSINESS COMPUTED ON BUSINESS PRINCIPLES. 2.3.4 JUSTIFICATION OF PROVISION OF DEVELOPMENT EXP ENSES (A) THE ASSESSEE FALLOWS THE MERCANTILE SYSTEM OF T HE ACCOUNTING. THE ASSESSEES SALES CONSISTS TWO THINGS; FIRST COST OF LAND AND SECOND DEVELOPMENT EXPENSES. SINCE THE DEVELOPMENT EXPENSE S CANNOT BE INCURRED ON PLOT TO PLOT BASIS AND BUT INCUR FOR WH OLE SCHEME AND SOME TIMES FOR ALL THE SCHEMES. THEREFORE, THE DEVELOPME NT EXPENSES TO BE INCURRED AGAINST THE PLOT SOLD IN A PARTICULAR YEAR HAVE TO BE ESTIMATED AND TO THAT EXTENT THE SALE IS SET PART UNDER THE NOMEN CLATURAL PROVISION FOR DEVELOPMENT EXPENSES. THE DETAILS OF THE PLOTS SO LD ARE GIVEN AT PB PAGE 26-27 OF PB. (B) AS PER THE NORMS OF JDA FOR PRIVATE TOWNSHIP, T HE DEVELOPER HAS TO INCUR SEVERAL EXPENSES ON THE DEVELOPMENT OF THE SCHEME SUCH AS EXPENSES ON INTERNAL ROADS, ELECTRIFICATION, WATER SUPPLY AND DEVELOPMENT OF PUBLIC PARKS AND FACILITIES ETC. THE COST OF THE SE EXPENSES IS INCLUDED IN THE SALE PRICE OF THE PLOT AND THE CHARGES AGAINST THE DEVELOPMENT EXPENSES (WHICH TO BE INCURRED BY THE DEVELOPER) IS NOT BEIN G CHARGED SEPARATELY IN ADDITION TO THE SALE PRICE OF THE PLOT TAKEN BY THE DEVELOPER. THE DEVELOPMENT WORK HAS TO BE CARRIED OUT AS PER THE S PECIFICATION OF THE JDA. THUS, THE SALE OF THE ASSESSEE IS SUBJECT TO A SCERTAINED LIABILITY OF DEVELOPMENT EXPENSES. THIS LIABILITY HAS ARISEN IN THE YEAR OF THE SALE O F THE PLOT. THE SAID LIABILITY OUGHT TO HAVE BEEN DEDUCTED FROM THE AMOU NT OF INCOME ACCRUED IN ORDER TO ARRIVE THE TRUE AND FAIR PROFITS OF A B USINESS OR PROFESSION, THEREFORE THE ESTIMATION OF FUTURE COST OF DEVELOPM ENT NOMENCLATURED IN BOOKS OF ACCOUNT AS PROVISION AGAINST DEVELOPMENT EXPENSES ARE ALLOWABLE EXPENSES U/S 37 OF INCOME TAX ACT READ WI TH SECTION 28 OF INCOME TAX ACT. 2.3.5 CONSISTENT ACCOUNTING POLICY IT IS PREVAILING ACCOUNTING POLICY OF ASSESSEE AND OTHER ASSESSEES OF SIMILAR TRADE TO MAKE PROVISION OF DEVELOPMENT EXPE NSES TO BE INCURRED ON AREA SOLD IN ORDER TO ARRIVE THE TRUE AND CORRECT P ROFIT AND THE ASSESSEE IS CONSISTENTLY FOLLOWING THIS ACCOUNTING PRACTICE. 17 2.3.6. BASIS OF ESTIMATION FOR PROVISION MADE FOR D EVELOPMENT EXPENSES. THE DEVELOPMENT WORK HAS TO BE CARRIED OUT AS PER T HE SPECIFICATION OF THE JDA. WE ARE ENCLOSING HEREWITH THE COPY OF THE ORDER OF JDA IN RESPECT OF THE DEVELOPMENT WORK AND ESTIMATE AMOUNT OF EXPE NSES ON EACH ACTIVITY OF DEVELOPMENT WHEREIN THE EXPENSES ON THE EACH ACTIVI TY WERE ESTIMATED BY JDA.. THE TOTAL COST ESTIMATED BY JDA IS 250 PER SQ MT AGAINST WHICH THE MADE PROVISION FOR EXPENSES @ RS. 175/- PER SQ YD. THE BREAK UP OF ESTIMATION OF THE ASSESSEE WAS AS UNDER:- ROAD WATER ELECTRIC PARK/FACILITY OTHER (STREET LIGHT, PLANTATION ETC) TOTAL ESTIMATED COST PROVISION MADE 51 47 38 17 27 180 175 THE SUMMARY OF SELLABLE AREA AND AREA SOLD IN THE SCHEMES IS AS UNDER: - A) HANUMAN VATIKA A-2 CONVERTED AREA AREA SOLD DURING THE YEAR CLOSING ST OCK AREA IN SQ. YARDS NO. OF PLOTS AREA IN SQ. YARDS NO. OF PLOTS AREA IN SQ. YARDS NO. OF PLOTS 6962.04 37 2488.92 14 4473.12 23 B) HANUMAN VATIKA A-3 CONVERTED AREA AREA SOLD DURING THE YEAR CLOSING ST OCK AREA IN SQ. YARDS NO. OF PLOTS AREA IN SQ. YARDS NO. OF PLOTS AREA IN SQ. YARDS NO. OF PLOTS 57968.27 44 33134.17 25 24834.10 19 TOTAL AREA SOLD 35623.09 SY COST OF DEVELOPMENT RS. 175/- PER SY TOTAL ESTIMATED COST = RS. 62,34,041/- 2.3.8 THE YEAR WISE CHART OF THE DEVELOPMENT EXPENS ES INCURRED BY THE ASSESSEE VIS A VIS PROVISION MADE FOR DEVELO PMENT EXPENSES AGAINST THE SALE IS AS UNDER. ASSESSMENT YEAR PROVISIONS FOR THE YEAR AGAINST CURRENT YEARS SALE DEBITED TO P & L A/C DEVELOPMENT EXPENSES ACTUALLY INCURRED DURING THE YEAR OUTSTANDING BALANCE IN B/S AGAINST DEVELOPMENT 18 PROVISION 2008-2009 6234040.75 6234040.75 0.00 6234040.75 2009-2010 260477.00 260477.00 0.00 6494517.75 2010-2011 2495806.95 3025312.77 1244645.00 8275185.52 TOTAL 9519830.52 1244645.00 2.3.9 LIABILITY TOWARDS DEVELOPMENT EXPENSES TO BE INCURRED IN FUTURE ON THE PLOTS SOLD DID NOT EXTINGUISH MERELY THE ASSESSEE HAS NOT INCURRED EXPENSES IN NEXT YEAR OR INCURRED SMALL PA RT OF EXPENSES IN AY 2010-2011 LIABILITY TOWARDS DEVELOPMENT EXPENSES TO BE INCURR ED IN FUTURE ON THE PLOTS SOLD DID NOT EXTINGUISH MERELY THE ASSESS EE HAS NOT INCURRED EXPENSES IN NEXT YEAR OR FOR NEXT FEW YEARS. THIS L IABILITY EXTINGUISH ONLY WHEN THE ASSESSEE ABSOLVE FROM THE LIABILITY TO CON STRUCT THE ROAD OR LAYING DOWN ELECTRIC POLE/WATER LINE ETC. AND THE ASSESSEE CANNOT BE ABSOLVED FROM THIS LIABILITY BECAUSE OF THE REGULATION OF JD A AND THE PLOTS SOLD BY THE ASSESSEE ARE SUBJECT TO THIS LIABILITY OF THE A SSESSEE. IT IS TRUE THAT THE ASSESSEE COULD NOT INCUR THE DE VELOPMENT EXPENSES IN THE AY 2009-2010. THE ASSESSEE HAD TWO SCHEMES ONE HANUMAN VATIKA A-2 AND SECOND IS HANUMAN VATIKA A-3 . THERE WERE GENUINE DIFFICULTIES IN CARRYING OUT THE DEVELOPMEN T EXPENSES; EXPLAINED AS UNDER:- A) HANUMAN VATIKA A-2 (I) THIS SCHEME IS SCATTERED IN THREE PARTS AND ALS O SURROUNDED BY THE LANDS OF OTHER AGRICULTURISTS. THE APPROACH ROAD WAS NOT THERE TO TRANSPORT THE MATERIAL FROM MAIN ROAD TO THE SITE O F THE SCHEME. THE OTHER AGRICULTURISTS WERE NOT ALLOWING TRANSPORTATION OF MATERIAL BY TRUCKS FROM THEIR LANDS. (II) THE JDA PASSED THE SCHEME FOR PART OF THE LAND . THE 90B PROCEEDINGS WERE COMPLETED ONLY IN RESPECT OF KHASA RA NO 217, 220 WHEREAS THE ASSESSEES SCHEME CONSISTS KHASARA NO 2 17, 220, 345 346 235 AND 236. THEREFORE, ON FINAL APPROVAL OF SCHEME, TH E SCHEME PLAN WAS SUBJECT TO CHANGE BY JDA, THEREFORE, THE CONSTRUCTI ON OF ROAD ETC CANNOT BE COMPLETED BEFORE FINAL APPROVAL OF SCHEME BY JDA IN RESPECT OF OTHER UNAPPROVED KHASARAS. (III) THERE WAS COURT CASE BY SOME PARTY OVER THIS LAND. THE COPARCENER AND OTHER PARTIES FILED COURT CASE AGAIN ST THE ASSESSEE AND THE ACTUAL POSSESSION OF THE LAND WAS NOT ALLOWED TO BE TAKEN BY THE ASSESSEE. (IV) THIS SCHEME WAS VERY SMALL SCHEME CONSISTING O NLY 37 PLOTS TOTAL AREA 6962.04 SY YARDS. THE ASSESSEE WAS EXPECTING TO GET MORE LAND FROM THE NEIGHBORING AGRICULTURISTS. B) HANUMAN VATIKA A-3. 19 THIS SCHEME WAS SITUATED ON THE PROPOSED SECTOR ROA D OF 200 WIDE. THE CONSTRUCTION OF SECTOR ROAD IS MADE BY JDA. THE JDA DID NOT START WORK FOR SECTOR ROAD, THEREFORE, THE CONNECTIVITY OF THI S SCHEME FROM THE MAIN ROAD WAS NOT THERE. 2.13 THE LD. AR HAS RELIED ON THE DECISIONS OF HON 'BLE APEX COURT IN THE CASE OF CALCUTTA CO, LTD. VS. CIT, 37 ITR 1 AND HAS RELIED UPON THE DECISION OF ITAT JAIPUR BENCH IN THE CASE OF SHREE SALASAR OVERSEAS (P) LTD . VS. CIT (ITA NO. 433/ JP/2011 FOR THE ASSESSMENT YEAR 2006-07 DATED 22-11-2011). 2.14 WE HAVE HEARD BOTH THE PARTIES. THE ISSUE BEFO RE US HAS BEEN DECIDED BY THE TRIBUNAL VIDE ORDER DATED 22-11-2011 IN THE CASE OF SHREE SALASAR OVESEAS (P) LTD. (SUPRA) . IT WILL BE USEFUL TO REPRODUCE FOLLOWING PARA FROM THE ABOVE ORDER. .. THE HON'BLE APEX COURT IN THE CASE OF BHARAT EARTH MOVERS VS. CIT 245 ITR 428 HAS HELD THAT IF THE BUSINESS LIABILITY HAS ARISEN IN THE ACCOUNT ING YEAR THEN DEDUCTION SHOULD BE ALLOWED ALTHOUGH LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DA TE. IN THE INSTANT CASE, THE ASSESSEE MENTIONED THAT SALE PROCEEDS OF THE PLOTS INCLUDED THE COST PLUS DEVELO PMENT EXPENSES AS JDA HAD PRESCRIBED THE NORMS THAT NO SEPARATE AMOUNT SHOULD BE CHARGED FOR DEVELOPMENT. THIS ITAT JAIPUR BENCH IN THE CASE OF M/S SWAPAN SAKAR INSURANCE CONSULTANT & MARKETING SERVICES (P) LTD. ( ITA NO.117/ JP/2010 FOR THE ASSESSMENT YEAR 2006-07 DATED 06-01-2011) HAD AN OCCASION TO CONSID ER THE ALLOWABILITY OF EXPENSES TO BE INCURRED IN THE SUBSEQUENT YEARS THOUGH THE LIABILITY OF INCURRING SUCH 20 EXPENDITURE HAS ACCRUED DURING THE PREVIOUS YEAR. I T WILL BE USEFUL TO REPRODUCE THE FOLLOWING PARAS FROM THE JUDGEMENT DATED 06-01-2011 30. THE HONBLE APEX COURT IN THE CASE OF CALCUTTA CO. LTD. V/S. CIT 37 ITR 1 HAD AN OCCASION TO CONSIDER THE ALLOWABILITY OF EXPENDITURE WHICH WAS TO BE INCURRED FOR DEVELOPMENT OF PLOT. THE ASSESSEE RECEIVED RS. 29,392 TOWARDS SALE PRICE OF LANDS BUT CREDITED THE ENTIRE FULL PRICE OF LAND IN ACCOUNTS ON THE BASIS OF MERCANTILE SYSTEM OF ACCOUNTING. A SUM OF RS. 24,809/- WAS DEBITED AS ESTIMATED EXPENDITURE FOR DEVELOPMENT, THOUGH NO SUCH SUM WAS SPENT. THE HEADNOTES OF THIS DECISION ARE REPRODUCED. HELD, (I) THAT THE UNDERTAKING TO CARRY OUT THE DEVELOPMENTS WITHIN SIX MONTHS FROM THE DATES OF THE DEEDS OF SALE (WHICH, IN VIEW OF THE FACT THAT TIME WAS NOTE OF THE ESSENCE OF THE CONTRACT, MEANT A REASONABLE TIME) WAS UNCONDITIONAL, THE APPELLANT BINDING ITSELF ABSOLUTELY TO CARRY OUT THE SAME. THAT UNDERTAKING IMPORTED A LIABILITY ON THE APPELLANT WHICH ACCRUED ON THE DATES OF THE DEEDS OF SALE, THOUGH THAT LIABILITY WAS TO BE DISCHARGED AT A FUTURE DAT E. IT WAS THUS AN ACCRUED LIABILITY AND THE ESTIMATED EXPENDITURE WHICH WOULD BE INCURRED IN DISCHARGING THE SAME COULD BE DEDUCTED FROM THE PROFITS AND GAINS OF THE BUSINESS, AND THE AMOUNT TO BE EXPENDED COULD BE DEBITED IN ACCOUNTS MAINTAINED IN THE MERCANTILE SYSTEM OF ACCOUNTING BEFORE IT WAS ACTUALLY DISBURSED. THE DIFFICULTY IN THE ESTIMATION THEREOF DID NOT CONVERT THE ACCRUED 21 LIABILITY INTO A CONDITIONAL ONE, BECAUSE IT WAS ALWAYS OPEN TO THE INCOME-TAX AUTHORITIES CONCERNED TO ARRIVE AT A PROPER ESTIMATE THEREOF HAVING REGARD TO ALL THE CIRCUMSTANCES OF THE CASE. (II) THAT THE SUM OF RS. 24,809/- REPRESENTED THE ESTIMATED AMOUNT WHICH WOULD HAVE TO BE EXPENDED BY THE ASSESSEE IN THE COURSE OF CARRYING ON ITS BUSINESS AND WAS INCIDENTAL TO THE BUSINESS AND, HAVING REGARD TO THE ACCEPTED COMMERCIAL PRACTICE AND TRADING PRINCIPLES, WAS A DEDUCTION WHICH, IF THERE WAS NO SPECIFIC PROVISION FOR IT UNDER SECTION 10(2) OF THE INCOME-TAX ACT, WAS CERTAINLY AN ALLOWABLE DEDUCTION IN ARRIVING AT THE PROFITS AND GAINS OF THE BUSINESS OF THE APPELLANT, UNDER SECTION 10(I) OF THE ACT, THERE BEING NO PROHIBITION AGAINST IT, EXPRESS OR IMPLIED , IN THE ACT. THE EXPRESSION PROFITS OR GAINS IN SECTION 10 (I) OF THE INCOME-TAX ACT HAS TO BE UNDERSTOOD IN ITS COMMERCIAL SENSE AND THERE CAN BE NO COMPUTATION OF SUCH PROFITS AND GAINS UNTIL THE EXPENDITURE WHICH IS NECESSARY FOR THE PURPOSE OF EARNING THE RECEIPTS IS DEDUCTED THERE FROM- WHETHER THE EXPENDITURE IS ACTUALLY INCURRED OR THE LIABILITY IN RESPECT THEREOF HAS ACCRUED EVEN THOUGH IT MAY HAVE TO BE DISCHARGED AT SOME FUTURE DATE. 32. THE HONBLE APEX COURT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. V/S C IT 225 ITR 802 HELD THAT DISCOUNT ON DEBENTURES IS TO BE WRITTEN IF PROPORTIONALLY EACH YEAR EVEN PERIOD OF EXEMPTION. THE HEADNOTE IS AS UNDER: SECTION 37 OF THE INCOME-TAX ACT, 1961, ENJOINS THAT ANY EXPENDITURE NOTE BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY 22 FOR THE PURPOSE OF THE BUSINESS OR PROFESSION SHOULD BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. THE EXPRESSION PROFIT OR GAINS HAS TO BE UNDERSTOOD IN ITS COMMERCIAL SENSE: AND THERE COULD BE NO COMPUTATION OF SUCH PROFITS AND GAINS UNTIL THE EXPENDITURE WHICH IS NECESSARY FOR THE PURPOSE OF EARNING THE RECEIPT I S DEDUCTED THEREFROM, WHETHER THE EXPENDITURE IS ACTUALLY INCURRED OR THE LIABILITY IN RESPECT THER EOF HAS ACCRUED EVEN THOUGH IT MAY HAVE TO BE DISCHARGED AT SOME FUTURE DATE. THUS, EXPENDITURE IS NOT NECESSARILY CONFINED TO THE MONEY WHICH HAS BEEN ACTUALLY PAID OUT. IT COVERS A LIABILITY WHICH HAS ACCRUED OR WHICH HAS BEEN INCURRED ALTHOUGH IT MAY HAVE TO BE DISCHARGED AT A FUTURE DATE. HOWEVER, A CONTINGENT LIABILITY WHICH MAY HAVE TO BE DISCHARGED IN FUTURE CANNOT BE CONSIDERED AS EXPENDITURE. 33. THE HONBLE GUJARAT HIGH COURT IN THE CASE OF WELDING RODS MANUFACTURING CO. V/S CIT 225 ITR 525 HAD ON OCCASION TO CONSIDER THE ALLOWABILITY OF PROVISION MADE THOUGH AMOUNT NOT ACTUALLY SPENT. TH E ASSESSEE BORROWED WELDING RODS AND WERE TO BE RETUR NED ON DEMAND. THE ASSESSEE MADE A PROVISION OF LIABILI TY ON ACCOUNT OF THE RISE IN PRICES. THE HONBLE HIGH COU RT OBSERVED THAT IN MERCANTILE SYSTEM OF ACCOUNTING, T HE BUSINESSMAN HAS TO TAKE INTO CONSIDERATION HIS LIAB ILITIES WHICH MIGHT BE EVEN CONTINGENT IN ORDER TO ARRIVE A T WHAT IS REAL BUSINESS PROFIT IN THAT YEAR. THE ASSESSEE HAS TO TAKE INTO CONSIDERATION HIS LEGAL LIABILITIES. 23 34. THE HONBLE RAJ. HIGH COURT IN THE CASE OF UDAIPUR MINERAL DEVELOPMENT SYNDICATE PVT. LTD. V/S DCIT 261 ITR 706 HAD ON OCCASION TO CONSIDER THE ACCRUAL OF LIABILITY. IN THIS CASE THE ASSESSEE AS PER AGREEMENT WAS REQUIRED TO RESTORE THE SURFACE LAND IN THE ORIGINAL CONDITION AND HENCE THE LIABILITY TO REFIL L PITS ACCRUED AS SOON AS PITS WERE DUG. IN THE INSTANT CA SE, THE ASSESSEE AS PER AGREEMENT WAS TO PROVIDE INSURANCE POLICY TO MEMBERS HAVING ATTAINED S-I CATEGORY AND HENCE LIABILITY ACCRUALS AS AND WHEN SUCH MEMBERS G OT CATEGORY OF S-I. 35. THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT V/S TUBE INVESTMENTS OF (INDIA) LTD. 261 I TR 753 ALLOWED PRO-RATA ANNUAL ALLOCATION OF PREMIUM PAYABLE AT FUTURE DATE. HENCE THE EXPENDITURE ALLOW ABLE UNDER MERCANTILE SYSTEM OF ACCOUNTING DOES NOT MEAN THAT IT SHOULD BE SPENT IN THAT YEAR. 36. THE HONBLE ALLAHABAD HIGH COURT IN CIT V/S DEVELOPMENT TRUST (P) LTD. 189 ITR 504 HELD THA T EXPENSES IN RESPECT OF DEVELOPMENT TO BE CARRIED BY ASSESSEE IS AN ALLOWABLE DEDUCTION UNDER MERCANTILE SYSTEM OF ACCOUNTING. 37. THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT V/S NAV BHARAT NIRMAN (P) LTD. 141 ITR 723 HAD ON OCCASION TO CONSIDER THE LIABILITY FOR EVICTING TEN ANTS AS THE AGREEMENT PROVIDED FOR EVICTION OF TENANTS BY L ESSOR. THE HEADNOTE IS AS UNDER:- 24 HELD, THAT IT WAS CLEAR THAT THE ASSESSEES RESPONSIBILITY TO EVICT THE TENANTS WHO WERE OCCUPYING ALMOST 200 BIGHAS OF THE LAND WAS AN ONEROUS RESPONSIBILITY. AS LATE AS 1972, PRACTICALL Y NONE OF THE TENANTS HAD BEEN EVICTED. THE LIABILIT Y TO EVICT THE TENANTS WAS IN THE NATURE OF AN INBUIL T LIABILITY UNDER THE LEASE DEED. THE ESTIMATED AMOUNT IN REGARD TO THE ASSESSEES LIABILITY TO EVI CT THE TENANTS WAS ALLOWABLE. THE ITO HAD GIVEN GOOD REASONS FOR RESTRICTING THE ALLOWANCE TO RS. 1,60,000/-. THIS WAS A FAIR AND EQUITABLE CONCLUSION ARRIVED AT BY THE ITO AND SINCE IT WAS A ONLY A QUESTION OF ESTIMATE, WITH WHICH THE TRIBUNAL HAD AGREE, IT COULD NOT BE INTERFERED WITH . THE ASSESSEE WAS THEREFORE, ENTITLED TO A DEDUCTION OF RS. 1,60,000/- FOR THE ASSESSMENT YEAR 1962- 63 . 38. THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF RAJASTHAN STATE MINES & MINERALS V/S CI T 208 ITR 1010 HAS OBSERVED AT PAGE 1014. A LIABILITY WHICH IS NOT ACCURATELY ESTIMATED COULD BE A CONTINGENT LIABILITY AND IS NOT AN EXPENDITURE. THE APEX COURT IN INDIAN MOLASSES CO. (PRIVATE) LTD. V/S CIT (1959) 37 ITR 66 REFERRED TO ABOVE, HAS HELD THAT THE EXPENDITURE IS WHAT IS PAID OUT OR AWAY AND IS SOMETHING WHICH HAS GONE IRRETRIEVABLY. EXPENDITURE, WHICH IS DEDUCTIBLE FOR INCOME-TAX PURPOSE, IS ONE WHICH IS TOWARDS A LIABILITY ACTUALLY EXISTING AT THE TIM E, BUT THE PUTTING ASIDE OF MONEY WHICH MAY BECOME EXPENDITURE ON THE HAPPENING OF AN EVENT IS NOT EXPENDITURE. THE INCOME-TAX LAW MAKES A DISTINCTION BETWEEN AN ACTUAL LIABILITY IN PRESENT AND A LIABILITY DE FUTURE WHICH, FOR THE TIME BEING , IS ONLY CONTINGENT. THE FORMER IS DEDUCTIBLE BUT NO T THE LATTER. IN CALCUTTA CO. LTD. V/S CIT (1959) 37 ITR, I, IT WAS HELD BY THE APEX COURT THAT IF A LIABILIT Y 25 HAS DEFINITELY BEEN INCURRED IN THE ACCOUNTING YEAR, EG., ON UNCONDITIONAL ACCRUED LIABILITY, IT CANNOT BE REGARDED AS A CONTINGENT LIABILITY MERELY BECAUSE IT IS TO BE DISCHARGED AT A FUTURE DATE AND THE COST OF DISCHARGING IT IS NOT DEFINITE BUT HAS TO BE ESTIMATED. SIMILARLY, IN BRITISH SOUTH AFRICA CO. V/S CIT (1946) 14 ITR 17 (SUPPL)(PC) IT HAS BEEN HELD BY THE PRIVY COUNCIL THAT WHERE A LIABILITY CLEARLY EXISTS THEN QUANTIFICATION OF THE SUM SHOULD NOT COME IN THE WAY OF THE ASSESSEE IN DEBITING THE SUM AND CLAIMING THE DEDUCTION THEREOF. IN ORDER TO ESTIMATE THE TRUE PROFITS A LIABILITY HAS TO BE DETERMINED. IT WAS OBSERVED BY THE SUPREME COURT IN THE CASE OF CIT V/S GEMINI CASHEW SALES CORPORATION (1967) 65 ITR 643 (HEADNOTE) : BROADLY STATED, THE PRESENT VALUE ON COMMERCIAL VALUATION OF MONEY TO BECOME DUE IN FUTURE, UNDER A DEFINITE OBLIGATION, WILL BE A PERMISSIBLE OUTGOING OR DEDUCTION IN COMPUTING THE TAXABLE PROFITS OF A TRADER, EVEN IF IN CERTAIN CONDITIONS THE OBLIGATION MAY CEASE TO EXIST BECAUSE OF FORFEITURE OF THE RIGHT . WHERE, HOWEVER, THE OBLIGATION OF TH E TRADER IS PURELY CONTINGENT, NO QUESTION OF ESTIMATING ITS PRESENT VALUE MAY ARISE, FOR TO BE A PERMISSIBLE OUTGOING OR ALLOWANCE, THERE MUST IN THE YEAR OF ACCOUNT BE A PRESENT OBLIGATION CAPABLE OF COMMERCIAL VALUATION. IT WAS FURTHER OBSERVED THAT WHERE ACCOUNTS ARE MAINTAINED ON THE MERCANTILE SYSTEM, IF LIABILITY TO MAKE THE PAYMENT HAS ARISEN DURING THE TIME THE BUSINESS IS CARRIED ON, IT MAY APPROPRIATELY BE REGARDED AS EXPENDITURE. BUT WHERE THE LIABILITY IS, DURING THE WHOLE OF THE PERIOD THAT THE BUSINESS IS CARRIED ON , WHOLLY CONTINGENT AND DOES NOT RAISE ANY DE3FINITE OBLIGATION DURING THE TIME THAT THE BUSINESS IS CARRIED ON, IT CANNOT FALL WITHIN THE EXPRESSION EXPENDITURE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. 26 A LIABILITY WHICH IS DEPENDENT ON FULFILLMENT OF A CONDITION WHICH MAY RESULT IN REDUCTION OR IN EXTINCTION OF THE LIABILITY IS A CONTINGENT LIABILI TY. IT IS ONLY THE ACTUAL LIABILITY WHICH IS EXISTING IN T HE RELEVANT ASSESSMENT YEAR WHICH IS ALLOWABLE TO BE CONSIDERED AS AN EXPENDITURE. IF THE LIABILITY IS CONTINGENT THEN IT WOULD AMOUNT TO ALLOWING THE APPREHENDED LOSSES IN FUTURE FROM THE PROFITS WHICH IS NOT ACCEPTED ON ANY PRINCIPLE OF LAW OR ACCOUNTANCY. THE QUESTION OF ESTIMATION IN A CONTINGENT LIABILITY ALSO DOES NOT ARISE IN ORDER T O ALLOW THE DEDUCTION UNDER SECTION 37 OF THE ACT. 39. THE WARRANTY PROVISION IS AN ALLOWABLE PROVISION AS IT AS PART OF THE AGREEMENT OF SALE. T HE HONBLE APEX COURT IN THE CASE OF ROTORK CONTROL IN DIA (P) LTD. V/S CIT 23 DTR 79 HELD THAT SUCH PROVISION IS ALLOWABLE AS IT RELATES TO PRESENT OBLIGATION AND I NVOLVES FLOW OF RESOURCES. IN THE CASE OF BHARAT EARTH MOVE RS V/S CIT 245 ITR 428, THE HONBLE APEX COURT HELD THAT T HE LIABILITY IS ALLOWABLE IF IT HAS ARISEN IN THE GEES THOUGH IT MAY BE QUALIFIED AND DISCHARGED AT A FUTURE DATE. 2.15 FOLLOWING THAT ORDER, WE HOLD THAT THE LD. CIT (A) WAS JUSTIFIED IN DELETING THE ADDITION. IT IS USEFUL TO NOTE THAT THE ASSESSEE HA S USED THE PERCENTAGE COMPLETION METHOD. WHEN AN ASSESSEE FOLLOWS THE PERCENTAGE COMPLETION METHOD THEN AT THE COMPLETION OF THE PROJECT, THE ASSESSEE HAS TO MAKE UP THE ACCOUN TS. AT THAT RELEVANT TIME, THE ASSESSEE CAN OFFER SURPLUSES FROM THE PROVISIONS OR MAY CLAI M THE DEFICIT IN CASE THE ACTUAL 27 EXPENDITURE IS MORE THAN THE PROVISIONS. HENCE, THE REVENUE IS NOT WITHOUT ANY REMEDY IN CASE THE PROVISION IS EXCESSIVE. ITA NO. 1078/ JP/2011 SHRI RAM CHANDRA AGRARWAL 3.1 THE ISSUE IN OTHER APPEAL IS SIMILAR TO THE ISS UE IN THE CASE OF M/S. SHREE RAM KRIPA BUILDWELL (P) LTD. FOR THE ASSESSMENT YEAR 2 008-09. FOLLOWING OUR FINDING IN THAT CASE, WE HOLD THAT THE LD. CIT(A) WAS JUSTIFIED IN DELETING THE ADDITION OF RS. 30,58,241/- 4. IN THE RESULT, THE APPEALS OF THE REVENUE ARE DI SMISSED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 13-01 -2012. SD/- SD/- (R.K. GUPTA) (N.L. KALRA) JUDICIAL MEMBER ACCOUNTANT MEMBER JAIPUR DATED; 13/01/2012 *MISHRA COPY FORWARDED TO :- 1. THE DCIT, CIRCLE- 6, JAIPUR 2. M/S. SHREE RAM KRIPA BUILDWELL (P) LTD. , JAIPUR 3. SHRI RAM CHANDER AGARWAL, JAIPUR 3 THE LD. CIT BY ORDER 4. THE LD. CIT(A) 5 THE LD.DR 6 THE GUARD FILE (ITA NO.1076 & 1078/JP /11) A.R, ITAT, JAIPUR